How to explain a grossly low price or cost?
The contractor’s explanation of a grossly low price or cost must indicate the specific factors making it possible to offer a low price or cost, supported by evidence. The burden of proving that the price or cost is realistic lies with the contractor. If this obligation is not met, the contracting authority will reject the contractor’s bid.
When the offered price or cost, or significant components thereof, appear to the contracting authority to be grossly low and raise doubts whether the contract can be performed, the contracting authority will ask the contractor for explanations (more here). A call for explanations gives rise to an obligation on the part of the contractor to provide explanations aimed at convincing the contracting authority that the price or cost offered enables the contract to be executed correctly, and that the fee received from the contracting authority is sufficient to cover all costs of the subject matter of the contract.
The concept of grossly low price or cost
To understand what kind of information should be included in the explanations given to the contracting authority, we should clarify the concept of grossly low price or cost. The parliament has not defined these concepts. The decisions of the National Appeal Chamber indicate that an offer with a grossly low price can be understood as an offer with an unrealistic price compared to the market price for similar orders. At the same time, it is necessary to compare the bid price to current market prices. If the price differs from the market price, it may mean that the contractor intends to perform the contract below its purchase or production costs. A preliminary determination of whether the price or cost is grossly low may also be made by reference to the value of the subject matter of the public contract. The concept of grossly low cost should be understood analogously to the concept of grossly low price, i.e. as an unrealistic cost not covering the costs generated by the performance of the contract.
Burden of proof
Where the contracting authority asks the contractor for clarification, the burden of proof that the bid price or cost (or their components) is not grossly low rests with the contractor. When the contracting authority asks for explanations, it creates a presumption of a grossly low price or cost which the contractor can rebut by providing convincing explanations and evidence that it is able to reliably execute the contract at the proposed price or cost. The contractor’s explanations should enable the contracting authority to decide whether to accept the bid for evaluation or reject the bid on the grounds of grossly low price or cost. If the contractor does not provide explanations or the explanations provided confirm the contracting authority’s view that the price or cost in the bid is grossly low, the contractor’s bid will be rejected. Submitting explanations not supported by evidence or general in nature may be deemed by the contracting authority to mean failure to provide explanations. And under the principle of equal treatment of contractors, submitting explanations after the deadline indicated by the contracting authority must also lead to rejection of the contractor’s bid.
Rules for providing explanations
The contractor’s explanations must not be of a general nature, e.g. limited to ensuring that the contractor will be able to execute the contract at its estimated price. The contractor must identify in detail specific, verifiable factors enabling it to offer a low price or cost. In addition, it is necessary to clarify to what extent a specific factor has reduced the price.
Art. 90(1) of the Public Procurement Law lists examples of circumstances that may justify a low price or cost. These circumstances have a fundamental impact on the price, so the contractor should refer to them in the first place. These include savings in contract execution methods, technical solutions, extremely favourable contract execution conditions available to the contractor (e.g. purchase of materials before a price increase), the originality of the contractor’s design, and labour costs. However, when providing explanations regarding labour costs, the contractor cannot argue that the bid price is based on labour costs lower than the minimum wage or hourly rate set in the Minimum Wage Act. Even if the contractor employs persons on the basis of civil contracts, it must use at least the minimum wage to calculate the bid price.
In its explanations, the contractor should also refer to the link between the price and the value of the subject matter of the contract or the arithmetic mean of prices of all the bids submitted. If the bid price is no more than 30% below these values, or higher than these values, it reinforces the contractor’s argument that the offered price is realistic.
Public aid (e.g. grants, subsidies or tax breaks) can be an example of a circumstance justifying a low price or cost. When referring to state aid, the contractor must also demonstrate that the state aid was granted legally, i.e. in accordance with the Act on State Aid Procedures of 30 April 2004.
Examples of evidence that may be submitted by the contractor
The contractor must support its explanations with evidence. The Public Procurement Law does not provide a fixed list of types of evidence that can be used by the contractor. Therefore, the contractor may submit any evidence that, in its opinion, supports its position.
If in order to perform the contract the contractor intends to purchase supplies from third parties or hire subcontractors, it should present with its explanations offers it has received, valuations, trade discounts, contracts, and/or invoices confirming the purchase of materials at the specified price, or other types of evidence from these entities confirming favourable cooperation terms and conditions lowering the price or cost. If the contractor does not plan to use services or works of third parties in performing the contract, a detailed calculation of the costs of performance of the contract is the basic evidence, taking into account the costs of materials, equipment, personnel and overhead related to the contract. However, a cost calculation and margin determination alone may not be sufficient to justify the feasibility of the price. The contractor should additionally explain the specific circumstances and their influence on the reduced price or cost. The contracting authority must obtain confirmation that the amounts detailed in the cost calculation have a market justification.
The low cost or price offered by the contractor may eventuate from the technology to be used or innovative equipment. In such a case, the contractor should include a description of the technology or equipment to be used.
The contractor may also prove that, due to its location close to the place of contract performance, it will not have to bear the cost of workers’ secondment or lodging charges. Cost savings may also result from performing several project tasks at the same time, which may contribute to lower costs due to economies of scale. In each case, it is advisable to give a specific calculation of the savings achieved by the contractor.
When explaining the pricing factors, the contractor usually provides information that constitutes its know-how and provides it with a competitive advantage. Under Art. 8(3) of the Public Procurement Law, to protect this information from disclosure to competitors in an annex to the protocol of the proceedings, the contractor may designate the explanations as trade secrets. To do so, it must demonstrate that the information provided meets all the requirements set forth in Art. 11(2) of the Unfair Competition Act, i.e. that
- The designated information has a technical, technological, organisational or other character with an economic value
- As a whole or in a particular combination or set of elements, the information is not generally known to, or readily accessible by, persons normally involved in this type of information, and
- Measures have been taken to maintain its confidentiality.
Katarzyna Śliwak, attorney-at-law, Infrastructure, Transport, Public Procurement & PPP practice, Wardyński & Partners